The bull run on Wall Street and a continued surge in home prices pushed consumer confidence to its highest level in almost six years.
The Thomson Reuters/University of Michigan consumer confidence index jumped to 84.5, up more than eight points from April and the highest rating since July 2007.
It is being fueled by the stock market, which despite Friday’s downturn, had a banner month in May. The Dow Jones was up an amazing 414.62 points for the month, the S&P 500 improved 48.04 points and the NASDAQ gained 156.78 points at the close of markets Friday.
More fuel came from the rebounding real estate market. Home prices were up 1.1 percent in March, the latest month with data available, making 14 consecutive months where real estate values have risen. Nationwide, housing prices are up 10.9 percent over the past year.
“The surge in consumer confidence is exactly the type of economic jump-start the Federal Reserve intended to result from its aggressive policies,” chief economist and director of the Consumer Research Center at the University of Michigan Richard Curtin said in a statement.
Not All Business Sectors Are Keeping Pace
The economy grew at an anemic 2.4 percent pace the first quarter of 2013 and some analysts expect that number to drop to 2 percent in the second quarter. Part of that is tied to federal government spending, which has slowed as agencies deal with $85 billion in cuts forced by sequestration.
Consumer spending was down 0.2 percent in April, the first drop in 11 months. Much of that was attributed to a drop in disposable income (down 0.1 percent) and falling gas prices that resulted in less spending.
Nonetheless, the all-important consumer confidence index rose to levels not seen since prior to the Great Recession. The average rating in the five years before the recession was 89, but dipped to 64.2 during the 18-month slump that ended in June 2009.
It is easy to see why people are happy this year.
The Dow Jones Index soared 2011.43 points (15.35 percent) since the first of the year. The S&P 500 is up 204.58 points (14.34 percent) and the NASDAQ has gained 436.4 points (14.45 percent).
“That kind of performance by the market almost always leads to better feelings as a whole about the economy,” Matt Kelly, senior adviser at Morgan Stanley told Debt.org. “Consumers are certainly going to feel good about things when they look at their retirement investments and see the 5 or 10 percent jump in such a short period of time. That should make everyone feel good.”
Uptick in Housing Industry
In the housing industry, increasing demand has pushed real estate prices higher every month, though they are well short of the peak numbers. Home prices are still down 28 percent from what they were at the peak in 2006, but the hardest hit cities are recovering some of their losses.
Las Vegas, Phoenix, San Francisco and Orlando are seeing double-digit gains in pricing – 22 percent in Vegans and Phoenix – as consumers take advantage of low mortgage interest rates.
There are warning signs, however, that cheap money for borrowing, may not last, or worse, may cause another bubble to burst on the entire industry. Mortgage rates have inched forward each week since bottoming out at 3.35 percent in early May.
The average rate for a 30-year loan was 3.9 percent at the close of business Friday, the highest it’s been in a year. That may have influenced an 8.8 percent drop in mortgage applications and a 12 percent drop in refinancing.